Annuities, IRAs and other retirement game-changers

Just climb out from under a rock? No worries, we got you covered, so to speak. Here’s a look back at some of the major retirement-related news that occurred in 2014.

myRA

In January, the federal government announced plans to create a new kind of retirement account called the “my Retirement Account” or myRA for short — a new type of Roth IRA.

The myRA will (at some point soon) give workers who don’t have an employer-sponsored retirement plan — that’s about half of all working Americans —a way to save for retirement. Under the plan, workers will be able to contribute a portion of their after-tax pay into a myRA account. The money would be invested a U.S. government bond fund. The maximum contribution to a myRA is $5,500 a year (or $6,500 a year for those 50 years or older), and the account can have a maximum account balance of $15,000, or a balance below the maximum for up to 30 years. The accounts would have the same tax treatment as Roth IRA.

According to Dallas Salisbury, the president and CEO of the Employee Benefit Research Institute (EBRI), “the advent of myRA by the Obama administration to make small accounts ‘free’ and to make small contributions possible” is particularly noteworthy. Among its many features, it’s “fully portable with an institution that is not going away,” Salisbury said.

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In January, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (Finra) announced plans to scrutinize transfers or rollover assets from an employer-sponsored retirement plan to an individual retirement account. Those announcements followed Finra’s Regulatory Notice 13-45, which was issued in December 2013 and which provided guidance on brokers’ responsibilities concerning IRA rollovers, according to Morgan Lewis.

“Companies have reviewed their procedures and made adjustments as needed, which may have resulted in a somewhat less aggressive approach to capturing rollovers this year,” said Matt Drinkwater, an assistant vice president at the LIMRA Secure Retirement Institute.

The Labor Department also continued to work in 2014 toward applying an ERISA standard to rollover transactions to prevent conflicts of interest. “From a consumer perspective, the new standard would potentially mean a new environment in which they make decisions about what to do with the money in their defined contribution plans upon job change or retirement,” said Drinkwater.

Nevin Adams, chief of communications for the American Society of Pension Professionals & Actuaries, said the “biggest nonevent” of 2014 is the fiduciary (re)proposal. “Never have so many waited so long with such concern (or optimism) with so little to show for it,” he said.

The 60-day IRA Rollover rule clarified

At the time, in April, retirement experts called it a game changer for the 50 or so million households in the U.S. that own an individual retirement account — an IRA. Yes, Uncle Sam’s Tax Court had ruled that the one-rollover-per-year rule applies to all of a taxpayer’s IRAs rather than to each IRA separately. And that ruling, experts said at the time, was in direct conflict with IRS Publication 590, the bible for IRAs. Read IRA rollover ruling stuns advisers and savers.

Qualified longevity annuity contracts (QLACs)

In July, the Treasury Department and IRS issued final rules on the use of longevity annuities — a type of deferred income annuity that begins at an advanced age — in 401(k) plans and IRAs.

According to Michael Finke, a professor of personal financial planning at Texas Tech University, the birth of QLACs is among the most important developments in the world of retirement planning in 2014.

In October, the Federal Reserve announced the end of its quantitative easing (QE) bond-buying program — its six-year effort to stimulate the economy. According to Salisbury, preretirees and retirees “who prefer to live through ‘coupon’ clipping for interest payments rather than taking principal risk” have reason to cheer the Fed’s announcement and promise of higher future interest rates.

During this zero-interest rate policy period, those who laddered their bond portfolios also had a tough time. “But there is now light in the tunnel ahead,” said Salisbury.

DIAs in TDFs

According to Olivia Mitchell, a professor at the Wharton School of the University of Pennsylvania and executive director of the Pension Research Council, another “landscape-changing” event also occurred in October. The Treasury Department and IRS approved the use of deferred-income annuities in target-date funds (TDFs) in 401(k) plans, including as a default investment. And that could go a long way toward making lifetime-income features more popular as well help retirees avoid outliving their nest eggs.

“One aspect of defined contribution plans which many have critiqued in the past is their inability to protect against longevity risk,” said Mitchell. “Allowing deferred annuities to become a permissible component of these plans is a long due innovation.”

Speaking of TDFs, Adams said he “looks at the massive amounts of money flowing into target-date funds, particularly for new hires who are frequently younger workers, and wonders how that might impact/influence savings as well as investment behaviors in the future.”

The November 2014 election is worth mentioning as well. Among the reasons:

One, Sen. Orrin Hatch (R-Utah) will become chair of the Senate Committee on Finance. According to Salisbury, Hatch has been focused on private retirement plan issues his entire career and he views the retirement system as “working.”

And two, Rep. Paul Ryan (R-Wisc.) was named chair of the House Ways and Means Committee. According to Salisbury, Ryan has focused on Social Security, Medicare, “welfare” programs and tax reform that would “produce the lowest possible rates without exceptions aimed at pushing citizens in particular directions.” This reflects, said Salisbury, “a balance of different views that will limit disruptive change and assure that deep consideration will go into any reforms.”

And three, no major reforms are likely for the next two years. “A 2014 election that assures that divided government will continue for another two years makes disruptive tax and design changes to retirement saving and retirement income and health programs unlikely, or at least that’s the case through major ‘reforms’ at the Federal level,” said Salisbury.

Of course, “some will view the lack of ‘reform’ undesirable, but for those preparing for retirement or in retirement the absence of disruptive change is likely to be smiled upon,” said Salisbury.

High stock prices/low interest rates

It didn’t happen in any one month per se. Rather it’s been a continuing problem for which the year 2014 will be remembered. “The high price of buying retirement income because of elevated stock prices and low bond yields,” said Finke. “And when the price of something you need in retirement goes up, like future income, that’s going to have an impact on your budget.”

Affordable Care Act

With many of the provisions of the Affordable Care Act (ACA) now implemented, there’s one item that will greatly benefit preretirees. The ACA gives “assured” access to health insurance in advance of Medicare eligibility, said Salisbury. And that means this: If older Americans are prepared financially for retirement they no longer have to continue working to have health insurance, he said.

State-sponsored retirement plans

Seventeen states now have initiatives under way to address workplace retirement plan coverage. That will have a big impact, said Adams. “While California has garnered most of the headlines and attention, it looks like Illinois will be the first to implement a program, Adams said. “It’s hard to say where these will wind up — there are different ‘flavors,’ of course — but I think it speaks to a widespread and bipartisan acknowledgment that workplace plans have been enormously successful at encouraging/facilitating the savings of even low-income workers.”

Multiemployer pension plan reform

The House, late on Dec. 11, approved legislation to revamp the multiemployer-pension program. The legislation would allow sponsors of multiemployer plans in “critical and declining” condition to temporarily or permanently cut members’ vested benefits to head off insolvency.

And the measure would also raise premiums paid to the Pension Benefit Guaranty Corp. from $13 to $26 for each participant.

“The dust hasn’t settled on this yet, but the multiemployer changes included in the “CRomnibus’ bill look to be significant, said Adams. “It’s a big problem, and it appears to have garnered some ‘significant’ solutions as well.”

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